The medigap gap

Medicare taxes young workers on the first and last dollar theyearn, regardless how poor they are, in order to subsidize medical bills forthose over age 65, regardless how rich they are. There is no conceivablejustification for such a scheme. Yet both Republicans and Democrats are nowthreatening to "reform" Medicare by greatly increasing future subsidies, andthus increasing future Medicare taxes.

The problem with the plan offered by House Democrats is that its10-year cost is about $1 trillion, which is $1 trillion too much. Theproblem with the Bush administration's plan is that its 10-year cost is $400billion, which is $400 billion too much. Taxpayers are already burdened withmore than 45 percent of all medical bills. That is not because 45 percent ofall Americans are poor. On the contrary, those being subsidized are oftenmore affluent than the taxpayers who subsidize them.

Additional subsidies for prescription drugs would boost demandfor such drugs and drive up their prices, thus pushing actual spending muchhigher. Even without these drug subsidies, the annual cost of Medicare isprojected to soar from $224 billion in 2000 to $425 billion by 2011. Costswill rise even faster after 2011, as the percentage of the population over65 really begins to soar. Medicare is insolvent, and extra subsidies couldmake its coming collapse really ugly.

As expensive as Medicare is, it covers only half of all medicalexpenses of the elderly. No sensible person would participate in Medicare ifit were not both heavily subsidized and mandatory. Medicare not only failsto cover prescription drugs, it also fails to cover even routine physicalexams, eye tests, hearings aids and, most importantly, catastrophicexpenses. Seniors are compelled to buy private medigap insurance to fillsome of these gaps, but medigap options for drug insurance are severelylimited by law.

Although there is much more to the president's plan thanprescription drug insurance, that is the key issue on which politicalbattles are being fought. Better access to drug insurance is one thing; fatsubsidies are quite another. Sen. Olympia Snow, R-Maine, has been widelyquoted saying, "Every senior should have access to comprehensive drugcoverage, regardless of which Medicare option they choose." Better access isindeed unobjectionable. The administration's fact sheet, by contrast,asserts that "all seniors should have the option of a subsidized prescription drug benefit." Why should all seniors be subsidized?Why should turning 65 entitle anyone to subsidies?

The main reason seniors have limited access to prescription druginsurance is that in 1992 Congress made it a crime for any insurance companyto offer such insurance.

More precisely, Congress required that Medigap policies beoffered as only 10 package deals, with health insurance available onlywithin the three most expensive packages. Although a Congressional BudgetOffice study says "medigap policies ... charge high premiums for drugcoverage," that is not really true. Medigap policies appear to charge highpremiums only because drug coverage is wrapped up in a big bundle withvarious other benefits, including coverage for foreign travel and for theentire cost of Medicare deductibles. You have to pay for costly insuranceyou don't want in order to get the drug benefit. The obvious solution is tounbundled the prescription drug plans, allowing drug policies to be soldseparately and allowing insurance companies to offer more or less generousdrug benefits for higher and lower prices.

Drug insurance within the top three medigap plans is far morecostly than a separate catastrophic policy with a large deductible, butCongress made it illegal to offer such an inexpensive policy. The standardplans, by contrast, leave seniors dangerously exposed to unusually high drugcosts. The annual deductible in the standardized plans is too low ($250),co-payments are high (50 percent), and drug expenses that exceed $6,250 arenot covered by even the most expensive plan. "Only 17 percent of Medicarebeneficiaries will spend more than $5,000 on prescription drugs in 2005,"CBO estimates, "but their combines spending will make up nearly 54 percentof total drug expenditures by Medicare beneficiaries that year."

People are generally quite satisfied with the quality, choicesand prices of goods and services they buy in the competitive marketplace. Ifyou don't like one supermarket or restaurant, you try another. Once thegovernment gets involved in either providing services directly (schools andpostal service) or mandating how private services must be provided (thestandardized medigap policies), the resulting loss of choice and competitioninvariably leaves many people unsatisfied.

The appropriate solution would be to minimize governmentinvolvement in such matters, such as leaving medical insurance questions tothe insurance companies and their customers. But the idea of solvinggovernment blunders by undoing them rarely gets much political attention.Instead, politicians invariably offer to fix problems caused by oneoverpriced, overbearing government program by adding yet another overpriced,overbearing government program. So it is today with these competing plans tofix the simple problem of federally limited access to drug insurance bygranting huge subsidies to old folks, regardless of their income or wealth.Fixing the access problem would be extremely easy, and the cost to taxpayerswould be just what it should be -- zero.